Fiat Bux

[NOTE: this post and this post are more recent – and therefore perhaps better refined editorially and substantively – discussions of fiat dollars and fractional reserve banking, respectively.]

Folks are constantly suggesting to me, when the subject of usury comes up, that a big part of the problem is fiat currency as opposed to currency backed by gold or some other commodity.

The more we discuss the matter the more convinced I become that they are wrong.

Money is nothing in itself: it is just a medium of exchange which makes it easier for parties to trade than actually trading a camel for a tent. As such it provides a tremendous social good, without which we would live in the stone age. It is perfectly reasonable and good, then, that money is an economic exchange medium provided by and guaranteed by the government.

Commodity-backed currency, though, is actually a wee bit more than just a medium of exchange. Gold, after all, has value in itself, since it is a useful commodity. Fiat currency has no value in itself. Because of this, fiat currency is a more honest medium of exchange than commodity-backed currencies which distort transactions somewhat through the introduction of the commodity itself into the picture. An ideal, transparent, honest transaction of camels for tents just involves the camels and tents; not camels, tents, and gold.

Fractional reserve banking is an entirely distinct matter from fiat currency versus commodity-backed currency. In fractional reserve banking, the bank keeps some amount of money at the Federal Reserve. That bank is then permitted to loan out up to N times that amount of money to borrowers: we’ll call this quantity of money L.

Not everyone needs their cash all at once, and folks are constantly making payments on outstanding loans, so the bank really only has to have L/N extra dollars on hand in order to cash checks drawn on L dollars worth of loans, on average. Figuring out the L/N relationship between these numbers – basically how much cash the bank has to keep on hand as a cushion in its cash flow – is the “fractional reserve” part in fractional reserve lending. (N.b.: the goal here is apprehension (and alliteration), not perfect pedantic pecuniary precision).

So far no usury, and as discussed above fiat currency is actually a better, more honest and transparent, medium for these transactions.

When the bank makes an asset-recourse loan, it only has recourse to a real asset in order to recover principal. In essence the bank “owns” a share of the asset and the borrower pays interest for use of the bank’s share of the asset, over time also buying out the bank’s ownership share. It’s all good: nobody has created money out of nothing or cheated anyone.

Notice that this is true even if the money is spent on something other than the asset to which the bank has resort: the owner in essence sells a share in the asset to the bank, and uses the proceeds for something else. Everything is still all good.

But when the bank makes a person-recourse loan, it has recourse to the person for the principal no matter what is done with the money. If the person spends the money on wine, women, and song, that money really came from nowhere. There is no real asset involved backing that money; just the person’s putative future ability to raise money to pay off the loan.

So the problem with fractional reserve banking as presently practiced isn’t fiat currency, and it isn’t that loans are made which exceed the amount of cash held in reserve. Neither of those is in itself the least bit dishonest or unfair.

The problem with fractional reserve banking as presently practiced is that some of the loans made in fractional reserve banking are usurious loans, because they involve recourse to persons, rather than assets, for principal. As usurious loans they steal from others, robbing buying power away from the currency itself, doing injury to the borrower and swiping an increment of buying power here and an increment there from the non-usurious transactions taking place at the same time, for the benefit of lenders.

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§ 40 Responses to Fiat Bux

I agree that A) fiat currency is not itself usurious, and that B) fiat currency is not in-and-of-itself immoral.

But I'm not sure I follow that it is more fair or honest than commodity-backed currency.

For example, let's say you have camels and I have tents, and we want to use an exchange medium rather than a physical trade or barter.

With a fiat currency, we have to rely on a third-party authority to determine the value of our exchange medium. Essentially, this is whatever the issuer of the currency says it is (hence “fiat”), obviously modified by the actual use in the market.

With a commodity-based currency, we rely on a third item which has value in itself, such as gold. The value of the currency is primarily determined by the value of the commodity.

Now, if you and I disagree about how much currency should be exchanged for a camel or a tent, we can appeal to the market to see what a fair value of the currency is. With fiat currency, we are essentially arguing about who is willing to spend/accept how much money. With commodity currency, we have a kind of standard: if we disagree about the value of tents and/or camels in relation to one another, we can appeal to the (more-or-less) constant relation of camels and tents to gold.

Doesn't the presence of a standard which has its own value add a level of fairness, rather than detract? (Not to say that a commodity standard can't also be manipulated unfairly, but it's an extra level.)

Money didn't come along thanks to some government. People trade; over time folks noticed things like gold were a good medium of exchange and it helped that most folks seemed to think it had an intrinsic value too.

Governments arrogate to themselves a monopoly on money and then devalue it. In the old days they lowered the amounts of metals in the coin; then came the fiat paper and printing presses; now billions and even trillions are made in electronic accounts.

Now, if I get that money first I can buy stuff at today's prices, while you'd get stuck with higher prices as that money moves through the system and it becomes obvious it's just money and doesn't represent anything else. We are about the business of allocating resources in the market- the current fiat currency schemes all muddy up the picture.

Now, in the realm of theory, you could make a fiat currency in which new notes were only made to replace old ones. An absolutely stable system, which would have to be untouched by human hands to last much more than a second, might even out perform gold. I think this is part of the reason it is so attractive to you- it does make a sort of sense, but it is really just an abstraction, living in that mythical world of ideals.

Here in the real world, the builder finds out he can't finish his building because he doesn't have as many bricks as he thought he had. Now multiply that idea out across an economy full of people in debt up to their eyeballs.

“So the problem with fractional reserve banking as presently practiced isn't fiat currency, and it isn't that loans are made which exceed the amount of cash held in reserve. Neither of those is in itself the least bit dishonest or unfair.”

It is the common law as it deformed under the legal positivism of the British, along with the British banking school that the above conclusions have come to dominate American monetary understanding and production. While I think Zippy is right that usurious loans have been a major problem, he is wrong to conclude that neither of the above mentioned is dishonest or unfair.

First, the major problem with fractional reserve banking is that it is inherently bankrupt as a system. It is bankrupt because the banks “borrow” from the depositor with the expectation that the deposit is callable at any time, all the while lending it out at a fixed period of time. And as such, what we have here is an impossibility. All depositors who have loans to the banks which they have the right to call at any time, cannot not be fulfilled by the banks due to the outstanding fixed loans. This situation is inherent bankruptcy. Further, upon such an understanding, to continue to operate in such a manner, while respectable and accepted, is quite dishonest.

By St. Thomas Aquinas' formulation of what a law is, the fractional reserve administrative rule fails to be a valid law since it is not an ordinance of reason because of its impossibility in fulfilling all obligations. The most impressive exposition of this inherent bankruptcy comes from the Spanish economist Jesus Huerta de Soto who first examines how and why the Continental banking law inherited from Roman law which forbid the practice of fractional reserve lending due to its impossibility in giving the depositor his due. De Soto second uses accounting methodologies to illustrate the regime's bankruptcy. His book is titled “Money, Bank Credit, and Economic Cycles.”

Getting back to the pyramiding that results from fractional reserves, this causes monetary inflation which is a tax on the savers and those on fixed incomes. It is important to note, today, the wealthy and the government are all massive debtors, by which savers, mom and pop bank accounts are disadvantaged. This situation is quite unfair, and unacceptable.

Second, dealing with the issue of a fiat currency, I think here we see legal positivism at its greatest and most manipulative of the general population, especially the poor. Fiat money, while not necessarily usurious, in the case of the dollar is quite problematic, and immoral. To quote Jorg Guido Hulsmann, what is happening is:

“The spiritual dimension of these inflation-induced habits seems to be obvious. Money and financial questions come to play an exaggerated role in the life of man. Inflation makes society materialistic. More and more people strive for money income at the expense of personal happiness. Inflation-induced geographical mobility artificially weakens family bonds and patriotic loyalty. Many of those who tend to be greedy, envious, and niggardly anyway fall prey to sin. Even those who are not so inclined by their natures will be exposed to temptations they would not otherwise have felt.”

The issues identified by Zippy under the traditional notions of usurious are immoral, but so too are other practices that do not fall under the traditional definition of usury. While we might not call practices like fractional reserve banking usurious, it does not mean they are not dishonest or immoral.

As for the state calling what has always been depository receipts money, it does not mean that it is money as ontologically understood, it does not mean it is the kind of money that can help man in making man live according to his nature. Thus, the state calling something money does not mean it should be money, just as the state denying the personhood of the unborn, does not mean the unborn is not a person.

“Now, in the realm of theory, you could make a fiat currency in which new notes were only made to replace old ones. An absolutely stable system, which would have to be untouched by human hands to last much more than a second, might even out perform gold.I think this is part of the reason it is so attractive to you- it does make a sort of sense, but it is really just an abstraction, living in that mythical world of ideals.”

That sounds correct to me. The issue isn't that paper is being made a medium of exchange. In theory, it wouldn't even _of logical necessity_ have to be a problem that the government had a monopoly on that type of paper. The problem with “fiat money” to which people refer is a problem with the the way the system not only actually works but always would and will work in practice–namely, the continual, repeated, increasing creation of apparent wealth where no real additional wealth exists, which devalues the currency that is already out there.

Nowadays, as best as I can understand it, that takes place through the federal reserve giving lenders more ex nihilo-created electronic money to lend. I can't tell whether it would end up being equivalent in practice to a system that “only replaces old money” or something like that if that lending could take place only in “asset resource loans.” Certainly the pace of the economy would be slowed tremendously–or so it appears to me–if the types of loans were thus radically restricted. And since fiat money creation is now tied so directly to lending, there might be a connection back to the problem of currency devaluation by government's creating additional faux wealth.

“And since fiat money creation is now tied so directly to lending, there might be a connection back to the problem of currency devaluation by government's creating additional faux wealth.”

This is dead on. And to get an understanding of the original intent of the Federal Reserve Act and its fiat nature in building the greatest pyramid scam in human history, just ask why did JP Morgan and the big bankers push to have the Act passed in the late hours one night in 1913? Rent seeking has its privileges.

There's another rather wryly humorous point that does occur to me: Our present mechanism of fiat money in the U.S. is based on federal bonds–the government's selling them or “buying” them, where the latter involves monetizing the federal debt by the creation of additional electronic fiat money.

A borrows money from B. A and B write up a bond that represents A's debt to B. That bond doesn't mature for a while–that is, A doesn't have to pay the money back to B immediately. The bond then takes on a market value of its own. People can buy and sell it and collect from A if they want when the time comes. So far, this doesn't appear to be a problem.

But there's just one thing: Any time A wants to do so, A can go to his computer and print out on his little printer a piece of paper that says, “I am worth a thousand dollars.” If A wants to discharge his debt to B, he can print out this money on his printer and use it to purchase, at the market price, his bond back from B. He now owes the money to himself, so the debt is canceled.

Whatever else that is, it ain't the type of asset-resource loan I've been seeing Zippy describe.

I agree with lots of what commenters are saying: we are like the fifth generation of alcoholics arguing over the legitimate medicinal uses of alcohol, which naturally makes the kind of discussion I am attempting difficult. Nevertheless, I think it is important to be able to separate in-principle concerns from as-has-been-practiced concerns.

Robert:Fiat money is better from an in-principle perspective precisely because it does not represent title to some particular commodity. X dollars represents the pure relative relation between the camels and the tents: today at the tent vendor it can buy three tents, at the camel vendor it can buy one camel. When we introduce the bank note as a title to some quantity of gold held at Fort Knox (say), we introduce all sorts of practical difficulties into the equation, not least of which is that going to Fort Knox to claim the gold is not a cost-free enterprise.

So as a pure medium of exchange, again, as understood by the medievals (as they are understood by Zippy), and understood in a context without any usurious transactions taking place, fiat money does not introduce the kinds of distortions introduced by commodity money.

I don't agree with August that money arises absent authority. It is true that merchants may exchange using commodities like gold directly without a government. But as soon as you introduce money – paper or computer-registered escrow of some sort standing in place of those commodities so that the commodities themselves don't have to be carried around – you have introduced authority into the picture. That highly valued small-in-size commodities were used for exchange before money, and that money evolved from those kinds of uses of commodities, is natural; but that doesn't mean that money is possible absent authority.

(I tend to think that Ron Paul types think they like commodity money as a matter of principle, but that when you get down to it they like it because of what they expect, perhaps wrongly, would be its practical effects. But then I'm an ignoramus myself, and when you combine ignorance with remote psychologizing, well, you get what you pay for).

Problems arise when real assets are taken out of the picture: when we start to think of “saving money” as literally saving money, as opposed to taking the money we just got from our employer and buying some real asset which we hope will retain value. When we think of money as something more, as something in itself, as more than a fleeting and artificial medium of exchange, as something we can expect to retain value when we put it in a mattress, we start to run into trouble.

This has been one of my gripes about government accounting and talk of federal debt and deficits for years. People assume that running a deficit – that is, taking on increasing levels of debt – is a bad thing while the economy of the country is growing. But that is a bunch of balderdash. We can't know if it is a good or a bad thing in a particular case without looking at the balance sheet of the federal government: without looking at the government's actual assets and liabilities in the context of operations. But the federal government has no balance sheet in the sense I care about as a business manager: it has no balance sheet where I can go and look at all the assets and liabilities, at where newly issued debt is invested specifically and how that newly invested debt impacts revenues directly, etc.

In short, our government has no management accounting. Because it has no management accounting, nobody knows – as with anthropogenic global warming, it is impossible in principle for anyone to know – whether a given deficit is (financially) beneficial or detrimental.

I don't have a full blown “theory of money”. But I am pretty convinced at this point that the lion's share of the shenanigans and lack of transparency in what is going on comes from the fact that we take usury for granted, treating money as a thing of value in itself rather than as a medium of exchange; and that our ability to do so rests in large part on person recourse as opposed to asset recourse contracts.

Having a little fun with the abstract fantasy here, I wonder if a lot of the money problems would go away if a given dollar was only valid for a week. If you don't buy a real asset with that specific dollar within a week of receiving it, it simply expires and is worthless.

Combine limited-life dollars with banning usury – that is, have the government treat usurious contracts as null and void and decline to enforce them – and things start to look interesting.

We still have the problem of the government being able to print more money, of course, although this is mitigated to some extent by the fact that peoples' assets are real, they aren't these fictitious things called “dollars” except in a very fleeting sense. Perhaps if the government had to publicly announce every printing of new money a month in advance of doing so that would mitigate that problem too.

Fiat money is better from an in-principle perspective precisely because it does not represent title to some particular commodity. X dollars represents the pure relative relation between the camels and the tents: today at the tent vendor it can buy three tents, at the camel vendor it can buy one camel.

I am puzzled about saying that. I have read a bit of the Mises group's theory, and I suspect that they would not be comfortable saying that. The value at any one time – snapshot situation – of the relative values of commodities and the money in play is extremely complex. And a big share of that complexity involves people's perceptions about what they “would” want, all other things being equal, when it never is the case that all other things are equal and as a result they don't even have a good grasp on their own “would” wants really are.

I recall an auction I went to once. Among many other items, there were about 8 bundles of 50 “silver certificate” one-dollars bills. The auctioneer spread the sale of these items through-out the evening. The first few went for about $56-58, I guess a fairly typical price for those who know what they can be sold for in the market. Later, the next couple sold for only $55. The last one put up, the auctioneer could not get an opening bid at $60, he backed down to $55, still no bid, backed down to $50, still no bid. Eventually, he went all the way down to $40 to find an opening bid, and got no takers. At this point he stopped his usual sales pitch, threw the hammer on the podium, and (quite irritated) yelled “people, I have 50 one dollar bills here. Do I hear $40 dollars.” Then he did in fact get a bid, and the price went up to $54 or so.

Or, to go back to the camels. Suppose that at the moment 1 camel = 3 tents, snapshot situation. The next minute you hear a rumor going through the market that there is a camel disease decimating the camels, and all of a sudden you can't sell your camel for even 1 tent. Later on that day, the rumor is refined: the disease is only hurting the one-hump camels. But you find that some people don't believe that refinement of the rumor, while other people do, and a third group never accepted the rumors at all. So with some people your 2-hump camels are worth 3 tents, with others they are only worth warm spit, and with another group they are worth 1.5 tents on a speculated probable estimation of what they are likely to be able to get next week when the rumors are sorted out. Nobody really knows how true or false the rumors are exactly, but the market reacts in a complex way and there is no such thing as THE price.

By the way, this situation is possible with gold money as well as with fiat money. But it may be more complex and more probable with fiat money.

The only way to avoid this kind of complex array of values for a single commodity is to not only have the authority issue the money, but for the authority issue the prices, by fiat as well. Of course, this never works, it only creates an underground market that ignores the fiat prices, so then you have to track the price on the “open” market that is ruled by law, but also on the black market, and its built-in price of doing business illegally (which price varies with the intensity of the local policeman's graft).

There are theoretical problems with an idealized notion of “the” single real value of X versus Y at any one time for the entire market. If I understand Mises (and I may not), in principle you can only talk about the actual real price in one specific exchange between actual buyers and sellers. What you get when you talk about the whole market is actually an aggregated and averaged out bunch of values only a few of which lie right exactly at the notional price.

I have read a bit of the Mises group's theory, and I suspect that they would not be comfortable saying that.

Oh, I agree. While I think that it is valuable to read Austrian, Chicago, and even (shudder) Keynsian economists, I find their overarching theories to be simply non-starters. I run into many objections just in reading the introductory premises, let alone all the machinery of the theory which follows. So I'm not an Austrian, Chicagoan, or Keynsian. I think they are all wrong, though I suppose it is likely that some are “more wrong” than others on particular subjects.

The only way to avoid this kind of complex array of values for a single commodity is to not only have the authority issue the money, but for the authority issue the prices, by fiat as well.

I don't think a complex array of values can be avoided even by fixing prices, though, not even in principle, unless you force people to keep what they are selling on the market.

Zippy, in your hypothetical world of expiring money, how does little Johnny learn the value of thrift and delayed gratification by having to save his pocket money to buy a new baseball glove? Instead, he's going to say to his parents, “But mom, if we don't buy the glove _now_, my money will expire!” Looks like a perfect situation for encouraging person-recourse loans. “Mom, you buy the baseball glove, and I'll pay you back gradually.” Which is not a good way to teach the virtue of waiting for what you cannot afford now, etc.

But isn't it a little arbitrary to let people buy consumables with their money before it expires or to buy, say, auto insurance, and to regard that as satisfying the requirement to buy an asset but not to regard money itself as an asset?

It isn't arbitrary, given that I've explained the reasons for it. Counter to some folks' intuitions, perhaps. Arbitrary, no. And if it reflects reality better than current practices, so much the better for little Johnny and his education through experience.

Those are gonna have to be awfully small bits of gold if he's going to be able to buy them with his fifty cents a week of allowance money. 🙂 What does it mean to buy a share in a savings account? Never 'eard of it.

But I should _like_ your idea, because it would probably in practice end up turning into something very much like a commodity currency system. Or so it seems.

I am going to call all of these investments “shares”, since they are asset-recourse shares in a business, not person-recourse loans.

Bonds/debt get a fixed rate of return guaranteed by the instutution, first claim on principal in a liquidation, and payback of principal and interest on a set schedule. A personal savings account at a bank – if you take the FDIC out of the picture – is basically a rolling form of this kind of “debt”: you are “guaranteed” your principal and a set rate of interest, as long as the institution continues to operate.

Common stock gets whatever dividends the company declares, and can reclaim principal by selling the shares — sometimes back to the company. They are last in line for recovery of principal in a liquidation.

Preferred stock is a mix — a set dividend much like interest, recovery of principal ahead of common (sometimes “participating” – meaning they get back more than the initial investment before common sees a dime) – and they also get declared dividends like the common.

Different kinds of investments also have different kinds of formal (and informal) influence over the management of the firm.

Anyway, the basic point is that a “savings account” is really just shares in a business: shares with a certain structure. It isn't “cash”, except as a kind of illusion to the man on the street.

Zippy, I fail to see how your “expiring money” could end up any better than just plain silver, gold, or any other commodity-money. In practice whatever “price” is set for a commodity in terms of the money, that price will include a huge discount for the lack of permanence of the money, which requires the seller/recipient to go out and spend it soon. This will naturally push everyone toward direct barter anyway, and the effort to re-issue new money every week and re-establish its value will be completely wasted. Nobody would bother.

I fail to see how your “expiring money” could end up any better than just plain silver, gold, or any other commodity-money.

It is important to keep in mind the nontrivial distinction between commodity-backed money and the commodity itself.

This will naturally push everyone toward direct barter anyway, and the effort to re-issue new money every week and re-establish its value will be completely wasted. Nobody would bother.

When someone introduces discussion of a thought experiment with “having a little fun with the abstract fantasy here, …“, it is important to keep in mind that the differences between a thought experiment – the purpose of which is to clarify thought – and proposals of concrete action are, as the kids say these days, epic. For example, the differences between the EPR proposal of Einstein and his colleagues, on the one hand, and the Aspect experiment, are, as they say, nontrivial. It is true that thought experiments sometimes lead to concrete realities, but the one should not be mistaken for the other.

The particular thought experiment can be played with here, as in, what would it mean if money expired once a year? A decade? etc etc.

“It is important to keep in mind the nontrivial distinction between commodity-backed money and the commodity itself.”

I suppose, though, that you could end up with a private system of commodity certificates or some-such that would function much like commodity-based currency, right? Before his government dollars expired, Little Johnny could buy a dollar's worth of “gold bux” from his local “gold bux” dealer and put them in his piggy bank, just as he would in a commodity-based currency system have put gold-backed dollars in his piggy bank.

There are already all sorts of ways to buy commodities and contracts on commodities, as a way of storing value. Of course there are also all sorts of non-commodity assets.

Heck, back when I was running a venture-backed startup we referred to stock in our company as “our currency”.

I think that if we weren't completely acclimated to usury we wouldn't think of money as valuable in itself. And we shouldn't think of money that way. Companies don't think of it that way: the “cash” on a company balance sheet doesn't actually refer to cash, which earns no interest, but rather to investments in highly stable and liquid interest bearing shares of various kinds.

There are already all sorts of ways to buy commodities and contracts on commodities, as a way of storing value.

True. But I think you will agree there is a big difference between having commodities themselves and having contracts on them: with a contract, it bears the risks associated with the interpretation of the contract in law and the enforcement of it. This applies also to merchant-issued “gold-bux”, or to green stamps, to coupons, etc.

OK, but I guess I'm puzzled about where you are going with that since what commodities themselves may and may not be used for is also subject to interpretation and authority. If the notion is that authority and interpretation can be completely removed from the picture at some level, well, with that I don't agree.

I am not trying to escape interpretation and enforcement altogether, I am willing to allow for it. But there is a difference in kind between having a commodity in your hands right now while there might be a dispute involving the authorities about how it is to be used, and having a certificate that says I have a right to the same commodity and there is a dispute about whether I can get the authorities to back me up and actually help me get my hands on the commodity. Possession is 9/10 of the way toward full enjoyment. If I have the commodity, I can use it for Y while I am still waiting for the authorities to decide that I can use it for X. And I can eat it if the commodity is a cow. I can enjoy the beauty if the commodity is a painting. If all I have is a certificate, then all the enjoyment I am going to have before the authorities support my effort to obtain possession is the anticipation of an eventual enjoyment.

Where am I going: just taking your thought experiment and seeing where it leads, that's all. Nothing special. It appears to lead to barter.

FWIW, in the financial world I think there is perhaps far more barter going on than may be obvious to the man on the street. I myself have been involved in very large transactions which involved no cash.

I hope this isn't a threadjack, but y'all may find it interesting to know that European governments are hostile to barter. I was reading about two women (evidently unmarried mothers) who worked different shifts (in England, I believe) and were baby-sitting each other's kids. The gov'ment began investigating whether they should be taxed for receiving a financially profitable benefit each from the other. The mind boggles.

The US gummint would say that they have, no “investigation” necessary. Any exchange of value, where one party's offering is a service, means the what he/she receives is income. Doesn't matter that the payment is not in money. The fact that it doesn't often go after babysitters doesn't change the principle.

[…] why so many people are wrong (in my view) about debt and economics is misunderstandings about currency. Currency has no value in itself: it merely facilitates the exchange of actually valuable things. […]

A Mutual Fund can suspend resumptions as long as necessary. A bank with deposits should not be able to. This is the essence of the fraud, not the loan side. If under any conceivable circumstance which doesn’t involve some disaster, you cannot make depositors whole, that is fraud.

If you hold less than 100% of the monies (originally gold by goldsmiths) you are entrusted, but loan out a portion, yet claim (without having a source of replacement gold) that at any time any or all can withdraw their deposits, it is fraud.

It is a lie. Breaks “thou shall not steal” and “thou shall not bear false witness’.

Either you are liquid or are not. Either you are solvent or are not. Either or. You can pay or not.

tz2026:A Mutual Fund can suspend [redemptions] as long as necessary. A bank with deposits should not be able to.

That’s a normative statement which doesn’t comport with reality. Bank deposits are in fact not actually cash, but a kind of share in the operations of the bank. Credit unions use more honest language to portray what is going on: you write “share drafts” not checks, for example. FDIC insured shares are still just shares, not cash.

There isn’t anything intrinsically wrong with this arrangement, and I don’t have a lot of sympathy for people who “put money in the bank” – that is, buy these kinds of shares – in 2012 without understanding the possibility of bank runs and FDIC insurance and such.

Mind you, I’d be the last person to give a free “honesty” pass to the actual marketing practices for financial products in 2012. My statements should not be taken as a blanket defense of all such practices.

But there isn’t anything intrinsically wrong with the business arrangements we call “savings accounts” and “checking accounts”, nor with their connection to fractional reserve banking, nor with the fact that they only remain liquid as long as operations stay within a normal range. In the Google Age anyone who makes those business arrangements with a bank without understanding them – at least to the extent of understanding that under extreme circumstances deposits might not be immediately available, and may disappear entirely unless the government makes good on FDIC guarantees – has only himself to blame.

[…] covered the subject of property and my thoughts on moral theology related to property: usury, currency, slavery, and the like. In order to do that I had to do some reading and take several steps back to […]

Technically, tying up a portion of the demand deposits in non-cash assets does not impair the ability to redeem the demand deposits as long as the assets are liquid or can be readily pledged as collateral. A bank faced with a large number of withdrawals could sell some of its mortgage portfolio to another bank, either permanently or under a repurchase agreement, or it could borrow funds from another bank with a claim against its full balance sheet. The problem arises if the bank’s investments have lost value: the bank needs an infusion of capital and thereby needs to sell additional shares to the public or be acquired by another bank.